Most Indicators Point to Continued Solvency Despite Its Financial Difficulties Created, in Part, by Its Past Decisions

HIGHLIGHTS

Losses of $146 million and $189 million in fiscal years 2008-09 and 2009-10, respectively, which were due, in part, to high delinquency rates on CalHFA's single-family loans and the costs associated with its high levels of variable-rate debt, raised questions about the solvency of CalHFA.

Although it will continue to face significant risks, its major housing programs and the fund it uses to pay its operating expenses will likely remain solvent. However, the fund set up to provide insurance on its mortgages will become insolvent by summer 2011.

Some of the biggest threats to CalHFA's solvency are the amount of variable-rate bond debt it holds—which as of June 30, 2010, constituted 61 percent of CalHFA's total bond debt—and the interest-rate swap agreements (interest-rate swaps) it entered into to mitigate the risks associated with variable-rate bonds.

The decisions approved by the CalHFA board of directors (board) to use variable-rate bonds and interest-rate swaps were a result of CalHFA's decision to pursue ever-increasing loan volume goals.

To increase loan volume, CalHFA introduced new 35- and 40-year loans, which provided for lower monthly payments and allowed borrowers to more easily qualify for loans. However, the delinquency rates for these borrowers proved to be twice as high as those with conventional 30-year loans.

The decisions to implement what turned out to be risky loan products were never brought before the board for a vote because such decisions are delegated to staff.